Floating-rate notes back in vogue in high-grade market

By Hillary Flynn

NEW YORK, Sept 21 (IFR) - Floating-rate notes are making a comeback in the US investment-grade bond market amid renewed interest from investors anticipating tighter monetary conditions in the US.

Typically little more than an afterthought, floaters have often been dropped from deals due to limited buyside demand - but that has changed in recent weeks.

"Investors are thinking: Why not look to floating rate notes?" said Chris Brechbuhler, portfolio manager at Clearwater Advisors.

While floaters only comprised US$20.35bn or 6.62% of total high-grade issues between July 1 and Sept 16, that already marks a 68% jump from the amount issued during the entire second quarter, according to IFR data.

Cisco Systems (HKSE: 4333.HK - news) , Deutsche Telekom International Finance and BP Capital Markets all opted to price FRNs on September 13, raising a combined US$1bn between them.

More borrowers are likely to follow suit.

"Floating rate notes are now more sellable to the investor base," said a syndicate banker. "They have become real pieces of financing."

The appeal of FRNs has been growing among fixed-income accounts who are not only looking to hedge against tighter monetary policy in the US but benefit from a rise in the Libor rate.

PIMCO, for one, has started to increase its exposure to FRNs on the belief that the pace of rate hikes will be faster than expected, Mark Kiesel, chief investment officer of global credit, told IFR.

"We think the Federal Reserve could actually go once this year in December and twice next year in a more aggressive path," he said.

While the Federal Reserve stood pat on rates on Wednesday, hawkish comments following the two-day FOMC meeting heightened expectations of looming hikes.

"The case for an increase in the federal funds rate has strengthened," the Fed said.

This comes as Libor - the interbank US dollar rate used on floating rate bonds - is also on the rise.

Libor has hit its highest levels in more than seven years as demand for bank commercial paper waned ahead of regulatory changes in the money market, which are set to take place on October 14.

Three month Libor stood at 0.86589% on Wednesday, up from just 0.325% on September 30 2015, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data.

Borrowers also like the diversification that comes with issuing floaters despite the arguably higher costs that such debt potentially brings.

This is particularly true for issuers who have already sold their fill of fixed-rate bonds across the curve this year.

"It is natural for them to come to other parts of the market," said Todd Mahoney, head of the fixed income syndicate at UBS (LSE: 0QNR.L - news) . (Reporting by Hillary Flynn; Editing by Paul Kilby and Shankar Ramakrishnan)